Working Papers

This paper presents five theoretical openness-and-growth links that can account for trade-induced investment-led growth. The links are all demonstrated with neoclassical growth models developed in the context of trade models that allow for imperfect competition and scale economies. This sort of old-growth-theory-in-a-new-trade-model has not been thoroughly explored in the literature since the profession skipped from old-growth-old-trade models straight to new-growth-new- trade models. Nonetheless, such models are necessary to explain several key aspects of the econometric evidence on trade and growth. For example, cross-country data suggests that openness influences growth only via its effect on investment, and suggests that openness promotes investment in all countries whatever the cap...

Many studies have found a positive correlation between trade and growth, but do not attempt to identify the economic mechanisms involved. This paper attempts to identify one of the mechanisms linking trade and growth. In particular, we present a novel theoretical model that establishes a link between trade liberalization and investment-led growth. Estimating equations are derived from the model and estimated with three stage least squares on a cross-country data sample. We find that domestic protection depresses investment and thereby slows growth. Foreign trade barriers also lower domestic investment, but the anti-investment effect is weaker and is less robust to sample and specification changes.

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